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Ludwig Von Mises

What is the market?

When people hear the term "market" the image that is conjured is not of the market itself but of a specific "market place". This is so because people do not generally understand the concept of "market", this is, the abstraction that the term "market" represents. As such people believe that "market" is a store, a mall, a supermarket, a collection of vendors in a plaza, a store district or neighbourhood and so on. Nothing could be further from the truth. The market is a process, or more precisely, a collection of processes. The Praxeological definition of market reads:

The process called "market" is the end result of all voluntary exchanges between free people disposing of their property as they see fit and without restrictions when they act to maximize its value.

In other words:

The market is simply free people freely exchanging their properties with the goal of satisfying their needs as much as possible, in a place where rights of property are respected.

The market can also be defined from a procedural perspective.

The market is the outcome of an evolutionary process whereby people attempt to improve their living conditions over existing ones by altering their actions in a manner which is believed to be the most efficient.

This evolution happens at two levels. The first one is slow in the sense that alternative processes to the market have been tried and discarded (e.g. plunder). The second level is continuous and is the process occurring inside the market where products and services offered to satisfy consumers evolve all the time based on buyers' acceptance or rejection of such offers.

What is a free market?

There is some level of confusion between the definition of "market" and "free market" that we need to clarify. From a strict Praxeological point of view there is only one "market" and this market is a "free market". In other words, in Praxeology

  • Market = Free Market

Furthermore, from a strict Praxeological point of view if a market is somehow interfered with by actors other than market participants (e.g. governments) this "free market" can no longer be qualified as a "market". It becomes something else for which Praxeology has no name.

In other words, in Praxeology the terms "market" and "free market" are interchangeable. However, this is not so in any other political or economic theory. In any other theory such as Communism or Socialism or Democracy or Tyranny or Monarchy and so on, any reference to "market" simply means a "managed market"; managed by the government.

In other words, for these theories

  • Market <> Free Market (<> means different)

From these theories a "market" is what you get once the "free market" has been interfered with by the government. However, because it is politically inconvenient to refer to a market as "market" (because it implies control), many politicians choose to re-define the term "market" as "free market". Hence the confusion.

Every time a politician makes a reference to "free market" what they are referring to is a "managed market" or a "manipulated market" and not a true -Praxeologically speaking- "free market".

Thus, when you hear the term "free market" you must analyze the context in which this terms is used. Typically when you hear this term it will be used by politicians who are referring to a "managed market". Sometimes they will use the term "market" and it must also be understood as a "managed market".

It is also very likely that you may come across the term "market" in Praxeological commentaries addressing problems or issues of the current "managed market". In this context the term "market" simply means "managed market" as defined by other political or economic theories and not a true "free market".

When Praxeology speaks in terms of a "market" or "free market" from a theoretical point of view, then it is very likely that it is referring to a true "free market" and not to a "managed market".

Who controls the "free market"?

Because in Praxeological terms the "free market" is simply the outcome of free people acting freely, this means that these people are not controlled by anyone other than themselves. This is important, so let's recap:

In a "free market" there is no centralized control.

However, under any other political or economic theory true "free markets" do not exist. We only have "managed markets". As such this implies that somebody or something is controlling what used to be a "free market". This somebody is the government. In other words:

In a "managed market" there is always centralized control of market activities.

Outcomes of centralized control

If in "managed markets" we have centralized control, we must ask ourselves what is the outcome of such centralization. Typically we have two outcomes:

Behavioural modification. People are forced to behave differently with their property than if they would be free to act as they see fit. For example forbidden products (e.g. drugs or medicine or weapons) or purchasing habits (buy tax-free products instead of taxed products even if the latter are inferior to the former) and so on.

Public properties. The state becomes the owner of many properties. As such the stated designates how those properties will be used and by whom.

Different political and economic theories differ only in the ways they accomplish these outcomes and the degree to which this is done. For example, in Communism behavioural modification is very extensive and everything belongs to the state. In a democracy behavioural modification is extensive but not overwhelming and public properties are typically limited to massive "services" such as road or schools or hospitals.

There are no political or economic theories or systems other than Praxeology that demand true "free markets".

Goal of centralized control

But what is the goal of centralized control? The goal is simple; to transfer the control of certain properties and certain behaviours from free people and into the hands of governments. In Praxeological terms this means the removal of those properties and processes from the "free market" thus disconnecting them from the factors of production.

In other words, in so doing governments de-couple or disconnect said properties and behaviours from their real cost. This concept is important because it lies at the root of government mismanagement of economic issues.

As "government properties" and "government laws" are removed from "free market" operations, they are no longer based on reality but on abstract theories. As such it is inevitable that they become detached from reality thus creating erroneous and un-sustainable systems.

But why would governments do so? There are two explanations:

Theoretical: The political and economic theory under which a government operates dictates that "good" must be understood as "common good". But a true "free market" operates on the notion that "good" is "personal good". As such the government must remove elements from a true "free market" to achieve "common good".

Practical: Politicians want to remain in their jobs. As such they must spend in order to "buy" votes. Spending can only be achieved by removing property from their rightful owners and "gifting" it unrighteous owners. This is so because governments produce nothing and therefore they have valid sources of income. In order to survive they must steal.

Means and ends

In a "free market" every person acts freely trying to achieve the maximum satisfaction of their goals. As such every individual is an end.

But in a "free market" this is only possible if purely voluntary exchanges are the only ones allowed. As such a party of any transaction will be an end while trying to achieve their goals, but it will also be the means through which the other counter-party attempts to satisfy their goals.

In a "free market" strictly operating under "voluntary exchanges" the means of one party can only be satisfied if the means of the counter-party are also satisfied. In other words, as the "free market" operates as a win-win machine, both parties must win. What this means is that in a "free market" both parties are simultaneously the ends to their own goals and the means to the goals of the other party. Definition:

In a free market every participant is both a means and an end.

Capitalist Markets

As we have seen before, through the voluntary exchange of goods and services parties determine the exchange ratio of one good or service to another. This "ratio" is called the "price". However, eventually, a common good originates to whom all other goods and services are rationed (i.e. priced) against. This common good is called money. Money serves many purposes. It is a store of wealth and also allows the comparison of one good or service against another. But the most important property of money is that it conveys information. This information translates the wishes and preferences of customers into a measurable quantity (i.e. the price). Because this quantity is now measurable, it is possible to use it to perform economic calculations with the goal to make more profits. This means that producers are now capable of estimating what to produce, where to produce it, how to produce and how much to produce in order to maximize profits, which is to maximize customer's satisfaction. When customer's satisfaction is maximized so are profits.

Producers are the people who use these kinds of economic calculations to buy or manufacture capital goods, which will serve to manufacture consumer goods and services. They accumulate these capital goods through the decision to consume less now with the intention of consuming more in the future.

But where do these capital goods come from? They come from savings. Producers deny themselves spending those savings now in consumer goods, in order to accumulate capital goods so that they may consume more in the future.

This means that capital starts with savings and therefore all people involved in saving are called capitalists.

Therefore capital markets are defined as:

Markets which are based on the use of capital or, in other words, the accumulation and use of savings for production purposes.

Note: please see the Glossary if you are unfamiliar with certain words.

2 Comments | Add yours
  • Guest (Norman)

    Thanks for another enlightening and informative lesson. Your explanations of Austrian Economics are the best I've come across.

    Like 0
  • Thank you kindly. We try :)

    Like 0
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